SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITITES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended:
September 30, 2004
Commission File Number 1-12506
LUCILLE FARMS, INC.
------------------
(Exact Name of Registrant as Specified in its charter)
Delaware 13-2963923
------------------------ ---------------------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation) Identification number)
150 River Road, P.O. Box 517
Montville, New Jersey 07045
--------------------- -----
(Address of Principal Executive Offices) (zip code)
(Registrant's Telephone Number, Including Area Code)
(973)334-6030
Former name, former address and former fiscal year, if changed since last
report. N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of Registrant's common stock, par value $.001 per share,
outstanding as of November 11, 2004 was 3,353,937.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, 2004 MARCH 31, 2004
------------------ --------------
(UNAUDITED)
-----------
CURRENT ASSETS:
Cash and cash equivalents $ 332,000 $ 611,000
Accounts receivable, net
of allowances of $179,000
at September 30, 2004 and $170,000
at March 31, 2004 4,825,000 4,618,000
Inventories 3,138,000 3,234,000
Prepaid expenses and other
current assets 567,000 684,000
------- -------
Total current assets 8,862,000 9,147,000
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 9,346,000 9,579,000
--------- ---------
OTHER ASSETS:
Deferred costs, net 205,000 215,000
Other 22,000 19,000
------ ------
Total other assets 227,000 234,000
------- -------
TOTAL ASSETS $18,435,000 $18,960,000
=========== ===========
See accompanying notes to consolidated financial statements
2
LUCILLE FARMS,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDER'S EQUITY
SEPTEMBER 30, 2004 MARCH 31, 2004
------------------ --------------
(UNAUDITED)
-----------
CURRENT LIABILITES:
Revolving credit loan $ 4,496,000 $ 4,281,000
Accounts payable 3,755,000 3,970,000
Current portion of long-term debt 1,687,000 711,000
Accrued expenses 461,000 568,000
------- -------
Total Current Liabilities 10,399,000 9,530,000
---------- ---------
LONG-TERM LIABILITY:
Long-term debt 4,854,000 6,423,000
--------- ---------
TOTAL LIABILITIES 15,253,000 15,953,000
STOCKHOLDERS' EQUITY:
Preferred Stock $0.001 par value
250,000 shares authorized,
216 shares Series A convertible
issued and outstanding -- 1,000
583 shares Series B convertible
issued and outstanding 1,000 1,000
Common stock, $ 0.001 par value,
25,000,000 shares authorized, 3,354,675
shares issued, 3,354,675 outstanding
at September 30, 2004 and 3,137,937
outstanding at March 31, 2004 4,000 3,000
Additional paid in capital 8,548,000 8,548,000
Accumulated deficit (5,059,000) (5,234,000)
------------ -----------
3,494,000 3,319,000
Less cost of 216,738 shares of treasury stock (312,000) (312,000)
--------- ---------
Total Stockholders' Equity 3,182,000 3,007,000
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,435,000 $ 18,960,000
============ ============
See accompanying notes to consolidated financial statements
3
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30
2004 2003
---- ----
SALES $ 11,752,000 $ 10,839,000
COST OF SALES 11,301,000 9,892,000
------------ ------------
GROSS PROFIT 451,000 947,000
------------ ------------
OTHER EXPENSE/:
SELLING 199,000 180,000
GENERAL AND ADMINISTRATIVE 318,000 267,000
INTEREST EXPENSE 234,000 180,000
------------ ------------
TOTAL OTHER EXPENSE 751,000 627,000
------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES (300,000) 320,000
PROVISION FOR INCOME TAXES -- 1,000
------------ ------------
NET INCOME (LOSS) $ (300,000) $ 319,000
------------ ------------
EARNINGS (LOSS) PER SHARE
BASIC:
$ (.09) $ .10
------------ ------------
DILUTED: $ (.09) $ .10
------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
BASIC: 3,338,817 3,137,937
DILUTED: 3,338,817 3,137,937
See accompanying notes to consolidated financial statements
4
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30
2004 2003
---- ----
SALES $24,716,000 $19,349,000
COST OF SALES 23,075,000 17,784,000
----------- -----------
GROSS PROFIT 1,641,000 1,565,000
----------- -----------
OTHER EXPENSE
SELLING 440,000 404,000
GENERAL AND ADMINISTRATIVE 548,000 454,000
INTEREST EXPENSE 477,000 365,000
----------- -----------
TOTAL OTHER EXPENSE 1,465,000 1,223,000
----------- -----------
INCOME BEFORE INCOME
TAXES 176,000 342,000
PROVISION FOR INCOME TAXES 1,000 1,000
----------- -----------
NET INCOME $ 175,000 $ 341,000
----------- -----------
EARNINGS PER SHARE
BASIC:
$ .05 $ .11
----------- -----------
DILUTED: $ .05 $ .11
----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
BASIC: 3,239,457 3,186,394
DILUTED: 3,245,143 3,186,394
See accompanying notes to consolidated financial statements
5
LUCILLE FARMS, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30
2004 2003
---- ----
Cash flows from operating activities:
NET INCOME $ 175,000 $ 341,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 475,000 460,000
Provision for doubtful accounts 9,000 --
(Increase) decrease in assets:
Accounts receivable (216,000) (1,218,000)
Inventories 96,000
(1,107,000)
Prepaid expenses and other current assets 117,000 100,000
Other assets 7,000 102,000
Increase (decrease) in liabilities:
Accounts payable (215,000) 1,410,000
Accrued expenses (107,000) 53,000
----------- -----------
Net cash provided by operating activities 341,000 141,000
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (242,000) (136,000)
----------- -----------
Net cash used In investing
Activities (242,000) (136,000)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from revolving credit loan-net 215,000 773,000
Principal payments on long-term debt and notes (593,000) (642,000)
----------- -----------
Net cash provided by (used in)
financing activities (378,000) 131,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (279,000) 136,000
CASH AND CASH EQUIVALENTS-BEGINNING 611,000 4,000
----------- -----------
CASH AND CASH EQUIVALENTS-ENDING $ 332,000 $ 140,000
----------- -----------
Non-Cash Financing Activity
Conversion of 216 Series A Convertible
Preferred Stock into 216,000 shares
of Common Stock $ 1,000 $ --
=========== ===========
See accompanying notes to consolidated financial statements
6
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of September 30, 2004, the Consolidated
Statement of Operations for the three and six month periods ended
September 30, 2004 and 2003 and consolidated statement of cash flows for
the six months period ended September 30, 2004 and 2003 have been
prepared by the Company without audit. In the opinion of management, the
accompanying consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the financial position of Lucille Farms, Inc. and subsidiaries as
of September 30, 2004, the results of its operations for the three and
six months ended September 30, 2004 and 2003 and its cash flows for the
six months ended September 30, 2004 and 2003.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Although the Company believes that the
disclosures are adequate to make the information presented not
misleading, it is suggested that these financial statements be read in
conjunction with the year-end financial statements and notes thereto for
the fiscal year ended March 31, 2004 included in the Company's Annual
Report on Form 10-K as filed with the SEC.
The accounting policies followed by the Company are set forth in the
notes to the Company's consolidated financial statements as set forth in
its Annual Report on Form 10-K as filed with the SEC.
Recent Accounting Pronouncements
The FASB has issued FIN 46 and related revisions, "Consolidation of Variable
Interest Entities." FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activity without additional subordinated financial support from
other parties. FIN 46 should be applied no later than the end of the first
reporting period that ends after March 15, 2004. FIN 46 does not have a material
effect on its financial position, results of operations or cash flows of the
Company.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and rewards. Accordingly, no compensation costs for
stock options are included in operating results since all awards were made at
exercise prices at or above their fair value on the dates of grants.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure", amending FASB Statement No. 123,
"Accounting for Stock Based Compensation." This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on operating results of an
entity's accounting policy decisions with respect to stock-based employee
compensation. SFAS No. 148 also amends APB Opinion 128, "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information.
In April 2004, ten-year options to purchase 5,000 shares of the Company's common
stock Option Plan were granted to six directors of the Company at an exercise
price of $3.00 per share. Such options vest immediately. Fair value was
determined on the date of grant using the Black-Scholes option pricing model
using an expected dividend yield of 0; a risk free interest rate of 4.4%,
expected stock volatility of 116%, and an expected option life of ten years.
7
The following table illustrates the effect on results of operations if the
Company had applied the fair value recognition provisions of SFAS No. 123 for
the six-month periods ended September 30, 2004 and 2003 (unaudited).
3-Mos ended 6-Mos. ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net (loss) Income as reported $ (300,000) $ 319,000 $ 175,000 $ 341,000
Deduct: Total stock-based
Employee
Compensation determined
under fair value method for
stock options, net of tax -- -- 42,000 --
========== ========== ========== ===========
Pro forma income (loss) applicable
to common stockholders $ (300,000) $ 319,000 $ 133,000 $ 341,000
========== ========== ========== ===========
Basic income (loss) per share, as reported $ (0.09) $ .10 $ 0.05 $ 0.11
========== ========== ========== ===========
Basic income (loss) per share, pro forma $ (0.09) $ .10 $ 0.04 $ 0.11
========== ========== ========== ===========
Diluted income (loss) per share, as reported $ (0.09) $ .10 $ 0.05 $ 0.11
========== ========== ========== ===========
Diluted income (loss) per share, pro forma $ (0.09) $ .10 $ 0.04 $ 0.11
========== ========== ========== ===========
2. The results of operations for the three and six months ended September
30, 2004 are not necessarily indicative of the results to be expected for
the entire fiscal year.
3. Inventories are summarized as follows:
September 30, 2004 March 31, 2004
------------------ --------------
Finished goods $2,170,000 $2,164,000
Raw Materials 439,000 691,000
Supplies and Packaging 529,000 379,000
------------ ------------
$3,138,000 $3,234,000
============ ============
4. The Company has a $ 5,000,000 revolving credit facility at September 30,
2004. The loan matures on November 30, 2004 at which time the outstanding
principal is due. The Company is seeking alternative financing to replace
this loan. Should the Company not be able to secure alternative financing
by the extended due date, it will request an additional extension of the
loan's due date. However, there is no assurance that such financing can
be secured or the extension granted. Failure to secure such financing can
have a significant negative effect on the Company's ability to fund
operational requirements.
8
5. Earnings per Share
Basic earnings per share is computed by dividing net earnings available
to common shareholders by the weighted average common shares outstanding
for the period. Diluted earnings per share is computed by dividing net
earnings available to common shareholders by the weighted average common
shares outstanding adjusted for the dilutive effect of options granted
under the Company's stock option plans, outstanding warrants, and
convertible preferred stock.
At September 30, 2004 and 2003, 1,166,666 and 1,382,666 potential common
shares, respectively, issuable upon conversion of preferred stock and
exercise of warrants are excluded from the determination of diluted
earnings per share as the related contingencies have not been met. The
dilutive effect of the 330,000 and 300,000 potential common shares at
September 30, 2004 and 2003, respectively, are outlined in the following
schedule:
Three-Months Three Months Six Months Six Months
Ended Ended Ended Ended
September 30, 2004 September 30, 2003 September 30,2004 September 30,2003
------------------ ------------------ ----------------- -----------------
Numerator:
Net income (loss)- basic $ (300,000) $ 319,000 $ 175,000 $ 341,000
----------- ----------- ----------- -----------
Net Income (loss)-diluted $ (300,000) $ 319,000 $ 175,000 $ 341,000
----------- ----------- ----------- -----------
Denominator
Denominator for basic earnings
per share
Weighted avg. shares 3,338,817 3,137,937 3,239,457 3,186,394
Effect of dilutive securities
Stock options -- -- 5,686 --
----------- ----------- ----------- -----------
Denominator for diluted
earnings per share 3,338,817 3,137,937 3,245,143
3,186,394
Earnings (loss) per share
Basic: $ (0.09) $ 0.10 $ 0.05 $ 0.11
----------- ----------- ----------- -----------
Diluted: $ (0.09) $ 0.10 $ 0.05 $ 0.11
----------- ----------- ----------- -----------
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
General
The Company's low moisture mozzarella cheese, which accounts for more than a
majority of the Company's sales, is a commodity item. The Company prices this
product competitively with others in the industry, which pricing is based on the
Chicago Mercantile Exchange Block Cheddar Market (CME Block Market). The price
the Company pays for fluid milk and condensed skim milk solids, a significant
component of cost of goods sold, is not determined until the month after its
cheese has been sold. The price of milk is based upon the raw milk components
and a weighted average of a number of market components. While the Company
generally can anticipate a change in the price of milk because of changes in the
CME Block Market, it cannot anticipate the full extent thereof. Therefore, if
the CME Block Market price to which our selling price is referenced changes at a
different rate than the price of milk our margins are affected accordingly. By
virtue of the pricing structure in the industry the Company cannot readily pass
along to its customers the changes in the cost of milk. As a consequence
thereof, the Company's gross profit margin for its products is subject to
fluctuation, which fluctuation, however slight, can have a significant effect on
profitability.
The Company is unable to predict any future increase or decrease in prices in
the CME Block Market as such market is subject to fluctuation based on factors
and commodity markets outside of the control of the Company. Although the cost
of fluid milk does tend to move correspondingly with the CME Block Market, the
extent of such movement and the timing thereof is not predictable. As a result
of these factors, the Company is unable to predict pricing trends.
Three months ended September 30, 2004 compared to the three months ended
September 30, 2003
Sales for the three months ended September 30, 2004 increased to $11,752,000
from $10,839,000 for the comparable period in 2003, an increase of $913,000 (or
8.4%). Approximately $772,000 (or 87.7%) was due to an increase in the number of
pounds of cheese sold from 6,289,000 pounds in 2003 to 6,790,000 pounds in 2004,
an increase of 501,000 pounds (or 8.0%) year to year. Sales for whey amounted to
$448,000 in 2004 compared to $340,000 for the same period last year, an increase
of $108,000 (or 31.8%).
Cost of sales and gross profit margin for the three-month period ended September
30, 2004 were $11,301,000 (or 96.2% of sales) and $451,000 (or 3.8% of sales),
respectively compared to a cost of sales and gross profit margin of $9,892,000
(or 91.3% of sales) and $947,000 (or 8.7% of sales), respectively, for the
comparable period in 2003. The increase in the cost of sales and corresponding
decrease in gross profit margin for 2004 as a percentage of sales were the
result of the selling price per pound of cheese dropping dramatically while the
price of milk did not decline proportionately with cheese; thus putting pressure
on our gross margins. Cost of sales was also affected by higher natural gas
costs, repairs and maintenance expense, and equipment rental.
Selling, general, and administrative expenses for the three-month period ended
September 30, 2004 amounted to $517,000 (or 4.4% of sales) compared to $447,000
(or 4.1% of sales) for the comparable period in 2003. Higher commission costs,
trade show costs, advertising expenses, bank charges, freight costs and travel
expenses accounted for most of the increase in expenses.
Interest expense for the three-month period ended September 30, 2004 amounted to
$234,000 compared to $180,000 for the same period last year, an increase of
$54,000. Higher balances and a higher interest rate on our revolver loan
accounted for the increase year to year.
10
The provision for income tax for the three month period ended September 30, 2004
reflects a minimum state tax, with the tax benefits of operating losses being
offset by the effect of changes in the valuation allowance. Such amounts are
re-evaluated each period based on the results of the operations.
The Company's net loss was $300,000 for the three months ended September 30,
2004, compared to net income of $319,000 for the comparable period in 2003. The
primary factors contributing to these changes are discussed above.
Six months ended September 30, 2004 compared to six months ended September 30,
2003
Sales for the six months ended September 30, 2004 increased to $24,716,000 from
$19,349,000 for the comparable period in 2003, an increase of $5,367,000 (or
27.7%). Approximately $5,520,000 (or 102.9%) was due to an increase in the
average selling price per pound of cheese from $1.43 last year to $1.86 this
year. This increase was offset by a decrease in the number of pounds sold from
13,110,000 pounds in 2003 to 12,869,000 in 2004, a decrease of 241,000 pounds
(or 1.8%) year to year. Sales for whey amounted to $970,000 in 2004 compared to
$678,000 for the same period last year, an increase of $292,000 (or 43%).
Cost of sales and gross profit margin for the six month period ended September
30, 2004 were $23,075,000 (or 93.4% of sales) and $1,641,000 (or 6.6% of sales)
compared to a cost of sales and gross profit margin of $17,784,000 (or 91.9% of
sales) and $1,565,000 (or 8.1% of sales), respectively, for the comparable
period in 2003. The increase in the cost of sales and decrease in gross profit
margins can be attributed to higher milk costs, labor costs, higher natural gas
costs, repairs and maintenance expenses, cleaning supplies and rent expense.
Selling, general and administrative expenses for the six months ended September
30, 2004 amounted to $988,000 (or 4.0% of sales) compared to $858,000 (or 4.4%
of sales) for the comparable period in 2003. Higher commission expenses, trade
show costs, advertising expense and bank charges accounted for the increase year
over year.
Interest expense (net) for the six months ended September 30, 2004 amounted to
$477,000 compared to $365,000 for the six months ended September 30, 2003, an
increase of $112,000. The Company's revolving bank line of credit was raised to
$5,000,000 during the current year and the interest rate was raised to prime
rate plus three percent whereas last year our revolving line of credit was
$4,000,000 and the interest rate was prime rate plus two percent. As a result,
the Company had larger loan balances and higher interest rates that accounted
for the increase.
The provision for income tax for the six-month period ended September 30, 2004
and September 30, 2003 of $1,000 reflect minimum state taxes. Charges for
federal income taxes were offset by changes in the valuation allowances for the
six months ended September 30, 2004 and September 30, 2003. Such amounts are
re-evaluated each quarter based on the results of operations.
The Company's net income of $175,000 for the six months ended September 30, 2004
represents a decrease of $166,000 from the net income of $341,000 for the
comparable period in 2003. The primary factors contributing to these changes are
discussed above.
11
Liquidity and Capital Resources
The Company had available a $5,000,000 revolving credit facility at September
30, 2004, which will mature on November 30, 2004 (with St. Albans Cooperative
participating therein to the extent of $4,000,000) at which time the outstanding
principal balance is due. The rate of interest on amounts borrowed against the
revolving credit facility is based upon the prime rate plus 3% (7.75% at
September 30, 2004). Advances under this facility are limited to 50% of
inventory (with a cap on inventory borrowing of $1,000,000) and 80% of
receivables as defined in the agreement. The commitment contains various
restrictive covenants including requiring the Company to generate an increase in
its dollar amount of net worth annually. The Company is seeking alternative
financing to replace this facility. Should the Company not be able to secure
alternative financing by the due date, it will request an extension until such
financing is secured. However, there is no assurance that such financing can be
secured or that the extension will be granted. Failure to secure such financing
or extension can have a significant negative effect on the Company's ability to
fund operational requirements.
At September 30, 2004, the Company had negative working capital of ($1,537,000)
as compared to negative working capital of ($383,000) at March 31, 2004. The
Company's revolving bank line of credit is available for the Company's working
capital requirements.
At September 30, 2004, $4,496,000 was outstanding under the revolving credit
line.
On February 8, 1999, a $4,950,000 bank loan agreement was signed. The loan is
collateralized by the Company's plant and equipment and guaranteed by the USDA.
Provisions of the loan are as follows:
A $3,960,000 commercial term note with interest fixed at 9.75 percent
having an amortization period of 20 years with maturity in February
2019.
A $990,000 commercial term note with interest fixed at 10.75 percent
having an amortization period of 20 years with maturity in February
2019.
On August 26, 2004, CoBank assigned its term loan for $1,000,000 with interest
payable at 1% above the prime rate to St. Albans Cooperative Creamery. The loan
is repayable in two consecutive annual installments of $500,000 with the next
installment due on May 1, 2005. The loan is collateralized by the Company's
plant and equipment and is used for working capital. This loan is the result of
St. Albans Cooperative Creamery paying off the term loan owed to CoBank by
Lucille Farms, Inc.
On May 16, 2002, the Company entered into an agreement with St. Albans
Cooperative Creamery, Inc. ("St. Albans"), the Company's primary supplier of raw
materials, pursuant to which St. Albans (i) converted $1,000,000 of accounts
payable owed by the Company to St. Albans into 333,333 shares of common stock,
(ii) converted $3,500,000 of accounts payable owed by the Company to St. Albans
into (A) preferred stock convertible into 583,333 shares of common stock, which
preferred stock (1) automatically converts into such number of shares of common
stock if the common stock is $8.00 or higher for 30 consecutive trading days,
and (2) may be redeemed by the Company for $3,500,000, and (B) a 10-year warrant
to purchase 583,333 shares of common stock (subject to adjustment under certain
circumstances to a maximum of 1,416,667 shares of common stock) at $.01 per
share, which warrant (1) may not be exercised for a period of three-years, (2)
terminates if, during such three-year period, the Company's common stock is
$8.00 or higher for 30 consecutive trading days, and, (3) in the event the
Company's common stock is not $8.00 or higher for 30 consecutive trading days
during such three-year period, may only be exercised on the same basis
percentage wise as the preferred shares are converted, (iii) converted an
additional $1,000,000 of accounts payable owed by the Company to St. Albans into
a convertible promissory note due on April 14, 2005, which note is convertible
into common stock at $6.00 per share at any time by St. Albans and, at the
option of the Company, automatically shall be converted into common stock at
$6.00 per share if the common stock is $8.00 or higher for a period of 30
consecutive trading days, and (iv) provided the Company with a pricing structure
for milk and milk by-products, for a minimum of one-year and a maximum of
four-years (subject to renegotiation at the expiration of the applicable
period), designed to produce profitability for the Company. The applicable
period for the milk and milk by-products pricing structure expired in May 2003.
Thereafter, St. Albans maintained the pricing structure through June 30, 2003.
Commencing July 2, 2003, and again as of September 1, 2003, the pricing
structure was modified to progressively decrease the benefits accruing to the
Company in light of the profitability of the Company.
12
The Company's major source of external working capital financing has been the
revolving line of credit. For the foreseeable future, assuming the line is
replaced, the Company believes that the Company's revolving line of credit will
continue to represent the major source of working capital financing besides
income generated from operations. However, failure to secure such replacement
financing or an extension of such line of credit can have a significant negative
effect on the Company's liquidity.
For the six-month period ended September 30, 2004, cash provided by operating
activities was $341,000. A profit from operations of $175,000 increased cash. In
addition, a decrease in inventory, prepaid expenses and other assets provided
cash while an increase in accounts receivable and a decrease in accounts payable
and accrued expenses decreased cash.
Net cash used by investing activities was $242,000 for the period ended
September 30, 2004, which represented purchase of property, plant and equipment.
Net cash used in financing activities was $378,000 for the period ended
September 30, 2004. Payments of the installment to Co Bank of $500,000 and the
Company's mortgage payments of $74,000 decreased cash.
The Company presently is seeking to replace its $5,000,000 secured revolving
credit line, the maturity of which has been extended to November 30, 2004. The
Company estimates that based on current plans and its ability to replace or
extend the revolving line of credit, its resources, including revenues from
operations and utilization of its revolving credit lines, should be sufficient
to meet anticipated needs for the foreseeable future. Failure to secure such
financing or receive such extension will result in a significant negative effect
on the Company's liquidity.
Safe Harbor Statement
This Quarterly Report on Form 10-Q (and any other reports issued by the Company
from time to time) contains certain forward-looking statements made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on current expectations that
involve numerous risks and uncertainties. Actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
known and unknown factors including, without limitation, future economic,
competitive, regulatory, and market conditions, future business decisions, the
uncertainties inherent in the pricing of cheese on the Chicago Mercantile
Exchange upon which the Company's prices are based, changes in consumer tastes,
fluctuations in milk prices, and those factors discussed above under
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Words such as "believes," "anticipates," "expects," "intends,"
"may," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. The
Company undertakes no obligation to revise any of these forward-looking
statements.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
In September 2004, the Company began to hedge the risks of the prices in the
cheese and milk markets to ensure profitability. The Company has undertaken a
program to sell cheese under long-term contracts and to hedge the transaction
through the purchase of milk futures. Increases and decreases in the price of
milk in the market (resulting in potential losses or profits on the sale of
cheese) would generally be offset by corresponding losses and gains on the
related hedging instruments, resulting in negligible net exposure for such
transactions. To date, the majority of our expense for milk is not hedged.
In designing a specific hedging program approach, the Company considers several
factors including offsetting exposures, significance of exposures, costs
associated with entering into a particular hedge instrument and potential
effectiveness of the hedge. Our hedging program reduces, but does not entirely
eliminate, the impact of milk price movements. Due primarily to our limited use
of the hedging program to date, the impact of the hedging program on milk
expense fluctuations has not been material to our consolidated financial
statements.
The Company is subject to interest rate exposure on variable rate debt. The
amount of that debt at balance sheet date of September 30, 2004 and March 31,
2004 amounted to $5,496,000, and $5,781,000, respectively. Since the interest
rate on debt is based upon the prime rate plus 1% or 3%, the cost of this debt
will increase or decrease accordingly with changes in the prime rate.
13
The Company has exposure to the commodity price for cheese, dry whey and fluid
milk. We have addressed these exposures in the general paragraph of Management's
Discussion and Analysis, Item 2 above.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Form 10-Q, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the CEO and CFO, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Securities Exchange Act of 1934 Rule 13a-14. Based upon the
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company required to be included in the Company's
periodic SEC filings.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any control
procedure also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.
Subsequent to the date of the Company's evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could affect internal controls.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 12, 2001, the Company sold $540,000 of Series A Redeemable Convertible
Preferred Stock to an accredited investor in exchange for roll drying equipment.
The shares were sold pursuant to Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder. On July 7, 2004, these shares were
converted to 216,000 shares of Lucille Farms common stock per the preferred
stock agreement.
On May 16, 2002, Lucille Farms, Inc. entered into an agreement with St. Albans
Cooperative Creamery, Inc., the Company's primary supplier of raw materials,
pursuant to which St. Albans (i) converted $1,000,000 of accounts payable owed
by Lucille Farms to St. Albans into 333,333 shares of common stock, (ii)
converted $3,500,000 of accounts payable owed by the Company to St. Albans into
(A) preferred stock convertible into 583,333 shares of common stock, which
preferred stock (1) automatically converts into such number of shares of common
stock if the common stock is $8.00 or higher for 30 consecutive trading days,
and (2) may be redeemed by the Company for $3,500,000, and (B) a 10-year warrant
to purchase 583,333 shares of common stock (subject to adjustment under certain
circumstances to a maximum of 1,416,667 shares of common stock) at $.01 per
share, which warrant (1) may not be exercised for a period of three-years, (2)
terminates if, during such three-year period, the Company's common stock is
$8.00 or higher for 30 consecutive trading days, and, (3) in the event the
Company's common stock is not $8.00 or higher for 30 consecutive trading days
during such three-year period, may only be exercised on the same basis
percentage wise as the preferred shares are converted, (iii) converted an
additional $1,000,000 of accounts payable owed by the Company to St. Albans into
a convertible promissory note due on April 14, 2005, which note is convertible
into common stock at $6.00 per share at any time by St. Albans and, at the
option of the Company, automatically shall be converted into common stock at
$6.00 per share if the common stock is $8.00 or higher for a period of 30
consecutive trading days, and (iv) provided the Company with a pricing structure
for milk and milk by-products, for a minimum of one-year and a maximum of
four-years (subject to renegotiation at the expiration of the applicable
period), designed to produce profitability for the Company. The applicable
period for the milk and milk by-products pricing structure expired in May 2003.
Thereafter, St. Albans maintained the pricing structure through June 30, 2003.
Commencing July 2, 2003, and again as of September 1, 2003, the pricing
structure was modified to progressively decrease the benefits accruing to the
Company in light of the profitability of the Company.
14
On June 10, 2002, B&W Investment associates, a partnership of which Howard S.
Breslow, chairman of the board of the Company is a partner, purchased, for
$25,000, a ten year warrant to purchase 500,000 shares of Common Stock at $3.00
per share. This transaction took place in connection with the conversion into
equity and long term debt of outstanding accounts payable owed by the Company to
St. Albans Cooperative Creamery, Inc. and the revision of the pricing structure
for milk and milk by-products.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Loan and Security/Stock Purchase Agreement, dated May 16, 2002, by and
among Lucille Farms, Inc., Lucille Farms of Vermont, Inc. and St Albans
Cooperative Creamery, Inc. Portions have been omitted pursuant to a
request for confidential treatment and have been filed separately with
the Securities and Exchange Commission. (1)
31.1 Certification of Periodic Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated November 15, 2004.
31.2 Certification of Periodic Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated November 15, 2004.
32.1 Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated November 15, 2004
32.2 Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated November 15, 2004.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed August 16, 2004, relating to the
results of operations for the period ended June 30, 2004.
15
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 15, 2004 Lucille Farms, Inc.
------------------
(Registrant)
By: /s/ Jay Rosengarten
--------------------
Jay Rosengarten,
Chief Executive Officer
By: /s/ Albert Moussab
--------------------
Albert Moussab,
Chief Financial Officer
(chief financial and accounting officer)
16
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
31.1* Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated November 15, 2004.
31.2* Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated November 15, 2004.
32.1* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated November 15, 2004.
32.2* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated November 15, 2004.
* Filed herewith
17